U.S. Houses Prices Bull, Bear or Crash Ahead Into 2016?

The most recent release for US House prices data for March 2015 (Case Shiller 10 City Composite) which despite rising by 0.8% on the month nevertheless continues to maintain a trend for the erosion of annual pace for house price inflation that remains below 5%, far lower than that of a year ago when US house prices were galloping ahead at near 14% per annum as illustrated by the momentum graph.

US Interest Rates Panic

The pundits in the mainstream press have taken the slowdown as further sign for the imminent demise of the US housing bull market by latching onto the likes of Saudi Arabia's war on the US shale oil industry resulting in an economic slowdown or that the Fed surely must soon start to raise interest rates which is ignorant of the reality that central bankers will only raise interest rates when they are forced to do so by the markets, namely to prevent a wage price spiral, support a plunging currency and to halt a bond market panic, all of which are crisis events rather than one of central bankers signaling orderly intentions, as it should not be forgotten that zero interest rates are a PANIC measure. Therefore contrary to the Fed's pronouncements, Fed policy remains in PANIC MODE, which means it will only be a greater panic that prompts actions to raise interest rates.

Again, I need to emphasis the point that interest rates since late 2008 have been in PANIC MODE, there is nothing normal about zero interest rates / negative real bond yields, and so the prospects for interest rate hikes should be viewed on as a result of a reaction to a greater panic for there is no free lunch as you cannot PRINT ECONOMIC GROWTH!

Therefore you can forget ALL of the noise in the mainstream press of the Fed RAISING US Interest rates because it is more probable that the Fed will CUT interest rates or likely manifesting itself in MORE QE i.e. the exact OPPOSITE of that which the mainstream press has been obsessing over for the whole of this year. Remember you heard it hear first that the Fed is more likely to LOOSEN Monetary Policy than TIGHTEN!

American homeowners who are struggling to make up for value lost during the financial crisis can expect recent gains in property prices to reverse...

Where house prices are concerned, rather than listing a long series of pronouncements from those who in large part will be unknown market commentators, I will once more just list the utterances from the widely recognised King of U.S. housing market data, Prof. Robert Shiller who once more recently warned not just against high housing market valuations but also for stocks, a bull market which he neither saw coming and has been caught on the wrong side of for many years.

The U.S. Federal Reserve should consider lifting interest rates sooner rather than later to tackle speculative bubbles in the housing and stock markets, Nobel Prize-winning economist Robert Shiller told CNBC on Monday.

"I'm thinking they (Fed policy makers) ought to be considering that, because that is the mistake they made in the past," the Yale University professor told CNBC Europe's "Squawk Box" when asked whether he believed the Fed should raise interest rates soon or later on.

"They didn't deal with the housing bubble that led to the present crisis. There's a suggestion in my mind that they should be raising rates now, (but) unfortunately the latest news looks a little weak on the demand side," Shiller added.

To further illustrate the point, Robert Shiller's current comments are pretty much the same as he was stating a year ago -

“How can it be that people think we can’t get a riskless return in real terms for 30 years? There’s something bizarre. That looks a little bit like a bubble as well. So the whole thing might correct—both bonds and stocks,” Shiller said.

Shiller said he’s also been “kind of surprised” by the housing market, which is up around 25% since the 2009 low (and even more in some cities).

“We’re seeing a sort of boom in the housing market,” he said. “We’ve got stocks and bonds highly priced and now we’re starting to see maybe housing going in the same direction. It’s like everything is pricey.”

Shiller looped back to his weekend article, which laid some but not all of the blame on the idea that anxiety can actually spur investors to grab on to any available asset, pushing up prices.

“Worries about the future can actually cause asset markets to be priced highly … When the Titanic was going down, people would pay a fortune for anything that floats. I’m exaggerating, of course, but that might be the situation we’re in now,” he said.

So what do academics such as Robert Shiller repeatedly miss ? They miss the significance of MOMENTUM and SENTIMENT on TREND which is ACCUMULATIVE as I have covered many times over many years.

In having immersed by myself in the markets for 30 years now, I know that what many academics tend to take for granted rarely matches reality. Whilst I covered many aspects of trading markets in my last ebook (Stocks Stealth Bull Market 2013 and Beyond - Free Download). However in terms of economic trends what academics will always fail to grasp is that markets are NOT driven by fundamentals but by SENTIMENT and it is SENTIMENT that CREATES the fundamentals! Which is why the academic economists rarely have any real clue as to what is going in the markets because they are nearly always looking in the WRONG direction i.e. they are looking at the CAUSE rather than the EFFECT, as in reality it is the EFFECT that makes itself manifest in the price charts long before the CAUSE appears in the economic data that academics focus upon, which is why the SAME economic data can and is used by economists and pseudo-economist (journalists) such as that which we see on TV news shows to explain EITHER price rises OR falls.

You can only know the markets IF you TRADE the markets! The pseudo and academics economists will never get you on the right side of trends years ahead of the herd, in fact most press media commentators will be some of the LAST people to jump onboard trends, usually just before they end!

Momentum Drives Housing Market Sentiment and Economic Growth

As house price rises continue to accelerate, many people sat on the sidelines waiting for prices to fall or even crash will realise that it is just not going to happen, and in their despair at the relentless accelerating trend of rising prices, in increasing numbers will feel no choice but to jump onboard the housing bull market as a they see the houses they have been viewing sold and asking prices trending ever higher.

As house prices rise, home owners see the value of their houses rise £x thousands per month, in many cases by more than their salaries, this will encourage many to borrow and spend more, and save less which will meet the governments primary objective for inflating the economy by means of the housing market. Everyone will be playing the game of how much has my house value increased by, a quick analysis of my own housing portfolio (based in Zoopla estimates) shows a 5.5% increase in housing wealth over just the past 6 months! Does this make me feel richer, more willing to spend? Well, being only human, YES it does!

So enough of the academic noise and the mainstream press that tends to regurgitate academic theories and sales pitches from the financial industry, instead here is my real take on the current state of the U.S. housing market in terms of PRICE, for at the end of the day all that matters is what the PRICE is doing.

U.S. House Prices Trend Forecast 2013-2016

My long standing forecast for US house prices covering the period November 2012 to early 2016 is now entering its final leg as excerpted below:

US House Prices Forecast Conclusion - As you read this, the embryonic nominal bull market of 2012 is morphing into a real terms bull market of 2013, with each subsequent year expected to result in an accelerating multi-year trend that will likely see average prices rise by over 30% by early 2016, which translates into a precise house prices forecast based on the most recent Case-Shiller House Price Index (CSXR) of 158.8 (Oct 2012 - released 26th Dec 2012) targeting a rise to 207 by early 2016 (+30.4%).

As a reminder, that at the time of the publication of my forecast highly vocal commentators such as Peter Schiff where strongly bearish on the outlook for U.S. Housing market as illustrated by his video of January 2013 -

"Prices have to fall, they are still much too high, and I think any body who is clinging to the hope that the real estate market has bottomed really should rethink those assumptions"

CK: You are notorious for making bold predictions. Of course, we can go back and look at those famous predictions you made leading up to that housing crisis in market crash in ’07. Is 2015 shaping up to be a disaster year or is it too soon to know at this point?

PS: Well, 2015, we are not quite half over yet. My guess is that and this is not going to be the year when it hits the fan. I do believe though that when the Fed does not raise interest rates the dollar will start to decline. But since it had such a big rally it has got a long way to drop, I think, before it would get into a situation that would cause a potential currency crisis which is where I think the end game is. But we could have something like that in 2016 or 2017. But I do think the end is near as far as when this crisis is going to occur.

But it is certainly possible that something happens in 2015. It is just hard to handicap it because you have got so many people that have no idea what is going on, and it is just a question of when are they going to open their eyes? When are they going to figure it out? In the housing market I was criticizing, pointing out the bubble, warning up the implication for years before the thing finally blew up. You just do not know how long it is going to take. Sometimes the bigger the bubbles are the longer they can last before people recognize them. Eventually, when they top, of course, the bigger they get the bigger the pop.

My in-depth analysis and concluding trend forecast was also published in a video version during Jan 2013.

U.S. Housing Market 2014

By early 2014, a year into the forecast, U.S. house prices had soared to well ahead of my forecast trend trajectory which I thus expected to slow sharply during 2014 as I expected U.S. house prices to converge towards my forecast trend trajectory during the year -

The latest data for October 2013 confirms my view that the U.S. housing market is going to be experiencing a severe slowdown in momentum during 2014 as the inflation rate drops from about 15% early 2014 to probably under 7% towards its end. This is in the context of my over-riding 3 year forecast of Jan 2013 to early 2016 as U.S. house prices look set to converge towards the forecast trend trajectory during 2014.

By mid 2014 the sharp slowdown in price rises will prompt many commentators in the mainstream press to proclaim that the bull market has ended, when in reality it would just represent the market laying the ground work for the next leg higher during 2015 as prices oscillate around the forecast trend.

Summary for 2014 - Sharp slowdown in U.S. house prices inflation to under 7% coupled with sharp acceleration in U.S. economy to GDP 4% to 4.25%.

Your analyst warning you not to pay any attention to the bubble talking fools during 2014, all of whom never saw this bull market coming and thus will continue to remain in a permanent state of denial just as they have been towards the stocks stealth bull market of the past 6 years. Understand this - we won't see a bubble peak in U.S. house prices for many more years.

Mid 2014 Update

By Mid 2014 the expected slowdown had begun and that I expected US house prices momentum to further weaken as prices continued to converge towards the forecast trend by the end of the year.

The latest U.S. house prices data released for May 2014 (185.3) shows that U.S. house prices are gradually converging towards trend forecast as I stated they would in January 2014, with prices now standing at forecast +5.3% (May data) deviation against +7.4% in January (Oct 13 data).

U.S. House prices momentum continues to slow from a peak of +13.9% for November 2013 data to now stand at +9.2% for May 2014 data which as I warned before has mistakenly prompted many to conclude that the U.S. housing bull market could be over when all that is taking place is that U.S. house prices are oscillating around a trend of 10% per annum, and as I indicated in January 2014, that I expected U.S. house price inflation to slow to UNDER 7% before the end of this year.

Furthermore US house price inflation looks set to continue to slow and could even slow to reach a trough of as low as 4% per annum house price inflation which whilst playing into the hands of the doom merchants, however in terms of the 3 year forecast will be of little significance.

A year on the slowdown has transpired to now stand at +4.7%, and as expected has garnered much doom commentary in the mainstream press by those who missed the WHOLE bull market, which begs the question what is there break even point ? For when one puts ones money on the line then when one is wrong one LOSES money and thus have a break-even point to where prices need to fall before SHORT Open position breaks even, which illustrates the point that the most vocal lack the must fundamental driver for generating reliable probabilities for outcomes, namely that of being conditioned by actual profits and losses which in my experience is the ONLY mechanism that can condition an analyst to generate high probability forecasts.

U.S. House Prices Trend Forecast Current State

The latest U.S. house prices data released for March 2015 (190.04) shows that U.S. house prices have fully converged towards my trend forecast, with house prices now exactly tracking the trend forecast.

Conclusion

Despite mainstream media persistent noise for an increasingly negative outlook for US house prices for a multitude of reasons, the ms-perception for which is supported by recent sharp drop in house price inflation to +4.7%, instead the continuing reality is for US house prices just oscillating around the central trend forecast of 10% per year as the long-term trend trajectory remains in tact for a rise of over 30% by early 2016. For which US house prices have about a years worth of price data to come.

Therefore I see no reason to undertake a more in-depth analysis at this point in time by delving into the fundamentals of the U.S. housing market such as looking at mortgage applications, housing starts, existing and new home sales data as the price has trended towards full convergence, thus U.S. home owners can look forward to at least another 9 months of a rising trend in house prices that I am sure will be accompanied by much gloom and doom commentary that I suspect will continue all the way towards NEW ALL TIME HIGHS for average U.S. house prices which I am sure will trigger much end of the bull market double top commentary by that time.

UK House Prices Brief

In terms of the current state of the UK housing bull market, the Halifax average house prices (NSA) data for May 2015 of £198,684 is currently showing a 3% deviation against the forecast trend trajectory, which if it continued to persist then in terms of the long-term trend forecast for a 55% rise in average UK house prices by the end of 2018 would translate into an 10% reduction in the forecast outcome to approx a 45% rise by the end of 2018.

The next big milestone will be when average house prices set a new record high, which despite the post election slowdown should be imminent, and we will probably see such headlines on release of July data which also illustrates the point that George Osborne missed achieving such headlines just prior to election day.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREEDaily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Comments

zahlen2k
06 Jun 15, 07:05

Interest Rates

Hi Nadeem

I agree with you, well I dont know if they will raise the base rates or not, but I think the long end rates go lower still. I dont know if you have heard of hoisington research, but they have been calling that well for a few years too, that the debt is so huge real gdp will be sluggish, and 10 yr yield alwyas below gdp % growth approx (fischer equation?).

In the UK, even if CPI picks up to 1-2% they probably wont raise right? I'm thinking could rates go lower in the UK, back when the 10 yr was like 1.7% with the eurozone continuing to show poor growth...

If you look at dow vs ftse since 2009, do you think long dow short ftse is a good trade? Ftse back at 6800's.

Apologies for long email. Thanks alot

Zahir

biju.joseph
09 Jun 15, 20:31

US Housing market - how will prices go up

Hi Nadeem,

Thank you for your analysis on US Housing market.

From your chart, it point to US Housing prices to reach previous highs, to be attained around end 2016.

- Do you have any analysis, when the US Housing prices may start to drop ? is it possible in 2017 ?

- Are there any implication of 30 year rate increase on the US housing market. So far it does not seem to affect US Housing prices.

Thank you

Long time follower

Nadeem_Walayat
09 Jun 15, 22:40

US Housing market

Hi

Unless US house prices start to significantly deviate from the trend trajectory then my next in-depth analysis / forecast will follow in early 2016 that will at least attempt to map out a trend for the next 3 years.

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